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The Chinese central government has greatly supported two strategic high- tech industries: 5G and supercomputing. However, when both encountered similar U.S. sanctions, the 5G industry failed to make crucial upstream components while the supercomputing industry could. This article argues that the central government- level industrial policies contributed to these divergent outcomes. Using natural language processing and qualitative content analysis of meticulously collected official documents and secondary sources, key policy differences were identi-fied. Before the U.S. sanctions in May 2019, China's 5G industrial policies were significantly unbalanced, with inadequate attention given to research and devel-opment of vital upstream components, contributing to a lack of upstream invest-ment. Although recent attempts to rebalance 5G industrial development since 2021, the policy focus remains largely on the mid and downstream segments. In contrast, before the U.S. sanctions in 2015, the supercomputing industrial poli-cies emphasised the development of the entire industrial chain, including crucial upstream components, resulting in China's possession of entirely homegrown supercomputers. Leveraging a tri- level analysis framework rooted in political eco-nomics, this study also offers possible explanations for the policy divergence and discusses implications. It contributes to the existing literature and ongoing debate on China and industrial policy amidst great power high- tech competition. This article was published by the SSCI-indexed Global Policy in July 2023, which can be accessed at https://doi.org/10.1111/1758-5899.13239 .

On 11 November 2022, the People's Bank of China and the former Banking and Insurance Regulatory Commission jointly issued the "Notice on Doing a Good Job in Current Financial Support for the Stable and Healthy Development of the Real Estate Market" (《关于做好当前金融支持房地产市场平稳健康发展工作的通知》), outlining 16 supporting policies, aimed at "maintaining orderly and stable real estate financing, improving financial services for building handover, handling risks of distressed real estate companies, and increasing financial support for housing rental". Since then, China's overall real estate policy has relaxed. On 10 July 2023, the People's Bank of China and the National Financial Supervision and Administration Bureau issued an additional notice to extend the policy period, reaffirming Beijing's commitment to supporting the "healthy development" of the real estate industry. The policy extension involves two key points: 1. Financial institutions were encouraged to actively support existing real estate development loans and trust loans, using methods such as loan extensions and adjusted repayment arrangements. Loans due before December 31, 2024, could be extended for an additional year without changing their classification. 2. For commercial banks adhering to Notice (2022) requirements, loans issued to support the delivery of unfinished projects before 31 December 2024 will not be downgraded in risk classification during the loan term. For newly issued loans that become non-performing, the related institutions and personnel who have fulfilled their duties can be exempted from liability. Despite the perceived moral hazard and the hurdle it presents to China's desired consumption-driven economic development model, Beijing's persistent policy support for the real estate industry raises the question: why does the Chinese government staunchly back this industry? Three political-economic explanations shed light on this conundrum. Firstly, sustaining economic growth is the primary national interest in China. As per the Proposal from the Fifth Plenary Session of the 19th Central Committee of the Chinese Communist Party, China aims to become "a medium-level advanced nation" by 2035. China is now in the process of rapid urbanization and industrialization. Even though the country's GDP growth rates are expected to be lower in the foreseeable future than in the last three decades, the government still aims to maintain modest growth rates of around 4-5% per annum. These targets reflect the Chinese top leadership's strong will to sustain the Kuznetsian modern economic development and the political legitimacy of the Chinese Communist Party. Over the past decade, the real estate industry has significantly contributed to China's "economic miracle", accounting for an average of 13.4% of GDP since 2013 (Figure 1). Figure 1. Real Estate Industry's Investment as % of GDP in China Source: Author's analysis from China's National Bureau of Statistics Assuming a total consumption coefficient of approximately 0.6, the real estate industry's total contribution to China's GDP in 2022 was estimated at 17-18%. Given the unstable external environment and the challenges of domestic economic transition, high-level fixed asset investment and support for the real estate industry appear to be the Chinese government's most viable options for the near and medium term. Secondly, Chinese local governments rely heavily on revenues generated from selling land to real estate developers. This land sales revenue forms a substantial part of the Chinese local governments' income (Figure 2). When adding taxes, the real estate industry contributes nearly 40% of the government's fiscal income. The fiscal income from the real estate developers is utilized for local economic development, including infrastructure projects. These infrastructure developments, in turn, attract further investments, stimulate local economies, and create jobs, forming a cycle of economic growth. As a rational player, the Chinese government, especially at the local level, has strong incentives to support and stabilize the real estate industry. Figure 2. Land Sale Revenue as % of Government Fiscal Income in China Source: Author's analysis from China's Ministry of Finance; note that with taxes, China's real estate industry accounts for nearly 40% of the Chinese government's fiscal income. It is certainly true that the land-sales-focused fiscal system could potentially lead to a myopic view in governmental decision-making, with an over-reliance on the real estate sector that has already led to an imbalance in the broader economy and raised concerns about long-term sustainability. Still, as a significant source of government fiscal revenue, the real estate sector is favored even at the expense of other vital sectors. Thirdly, the real estate industry employs a significant portion of the workforce. According to the Fourth National Economic Census, as of 2018, the industry directly employed 12.64 million people, a 44% increase compared to the end of 2013. Considering the housing construction industry, which employed 35.91 million workers, the total number of people in real estate-related jobs in 2018 was close to 49 million. During times of economic hardship, the role of the real estate industry as a significant employment support becomes exceptionally crucial. Over the last five years, due to the U.S.-China trade war, the pandemic, and domestic deflationary pressure, China's surveyed unemployment rates in 31 large cities have increased more than 12% to 5.5%. More notably, surveyed unemployment rates of workers between 16 and 24 years old have spiked 86% to 20.8% (Figure 3). If widespread unemployment were to occur within the real estate industry, the consequences could be far-reaching, causing more extensive economic damage and social problems. Therefore, the resilience of the real estate industry is of paramount importance for the Chinese government to stabilize the Chinese economy and society for the foreseeable future. Figure 3. Surveyed Unemployment Rates in China Source: Author's analysis from China's National Bureau of Statistics In summary, despite the Chinese government's insistence that "houses are for living, not for speculation" to curb speculative bubbles in the real estate industry, it has consistently supported this sector due to its crucial role in underpinning China's GDP, generating governmental fiscal revenue, and preserving employment. The government is likely to continue propping up the real estate industry to prevent systemic issues in the foreseeable future. Twelve years ago, I argued in a VoxEU article that the path of China's economic transition would be bumpy. My current analysis suggests that the journey remains challenging and prolonged. The real estate sector, while it has been instrumental in China's rapid economic growth, presents complex challenges in the context of this transition. Balancing economic stability, employment preservation, and the prevention of speculative bubbles has been and will continue to be a delicate task.

Since 2018, the United States has been responding to China’s meteoric economic rise and its own relative decline with a slew of protectionist policies, such as subsidies, at-the-border and behind-the-border trade barriers, and foreign investment restrictions. These policies have naturally elicited retaliations[i] from the Chinese government. As a result, over the last few years, great power competition between the United States and China has intensified. However, despite this intensification in competition and increase in trade protectionism, bilateral trade and investment have not diminished. What explains this contradictory phenomenon? Despite the ongoing U.S.-China trade war, U.S. exports to China in 2021 witnessed a 21.4% increase to $151 billion. U.S. imports from China also increased by 16.5% to $506 billion. More notably, U.S. trade with China in 2021 rose above the prior five-year average.[ii] Last year, bilateral trade continued to grow. China remained the top source of U.S. goods imports, which reached $537 billion in 2022. In the same year, U.S. goods exports to China exceeded $153 billion.[iii] The top commodity sectors in U.S.-China bilateral trade are Machinery and Mechanical Appliances, Chemicals, Plastics, Rubber, and Leather Goods.[iv] It is undeniable that both the Trump and Biden administrations have strengthened export controls to China. Still, the U.S. Bureau of Industry and Security approves the majority of Chinese export and re-export license applications. Between 2017 and 2021, approved licenses for tangible items, software, and technology to China increased impressively from approximately 3,000 to nearly 4,000, although the average processing time doubled over the five years[v], suggesting that U.S. scrutiny has indeed become stricter. On the investment front, despite tougher regulations such as the U.S. Foreign Investment Risk Review Modernization Act and Chinese Measures on National Security Review of Foreign Investment,[vi] foreign direct investment in the United States from China increased from $35.4 billion at the end of 2018 to $38.5 billion in 2021.[vii] Moreover, Chinese venture capital investments in the United States increased to $3.2 billion in 2020 from $2.3 billion in 2019. More than half of these investments were in the Health, Pharmaceuticals, and Biotechnology sector.[viii] In the meantime, U.S. investments in China also have not diminished. U.S. foreign direct investment in China was $123.9 billion in 2020, a 9.4% increase from 2019[ix]. In the artificial intelligence sector alone, from 2015 to 2021, U.S. investors accounted for 17% of global investment transactions into Chinese companies. In addition, 37% ($40.2 billion) of the total capital raised for Chinese artificial intelligence companies involved U.S. investors.[x] U.S. multinationals such as McDonald’s, Starbucks and Ralph Lauren are expanding – rather than pulling back – their investments into China.[xi] One explanation for the continuing trade and investment ties between the two countries is that both countries are deeply embedded in the global supply chains, making “decoupling” nearly impossible in the near and medium term. Another reason for continuous two-way investments is that both the U.S. and Chinese markets are enormous. Profit-driven companies in both countries are incentivized to continue doing business with one another. The third reason is that there is a bidirectional causal relationship between foreign investment and trade.[xii] Finally, multinational firms (including U.S. firms) remain bullish on the long-term growth prospects of China’s huge consumer market – the second largest in the world. In the future, from a neoliberal economic perspective, and if both countries want to maximize economic gains for themselves, both the United States and China need to strengthen trade and investment through bilateral and multilateral channels. At the bilateral level, not only should high-echelon officials communicate with each other, but—perhaps more importantly—influential multinational corporations also need to engage with local communities. Wanxiang America is a good example of how a company can maintain responsible stewardship and successfully navigate great power rivalry. As a subsidiary of China-based company Wanxiang Group, it has invested massively in the U.S. market, including the automobile and clean energy sectors; created numerous American jobs; and donated roof-top solar panels to more than fifty American schools.[xiii] With more community-based companies emerging, mutual understanding and economic interconnectedness will be entrenched and reinforce each other, moving both countries toward a cooperative equilibrium. At the multilateral level, many platforms, such as the World Trade Organization, Indo-Pacific Economic Framework, and the Regional Comprehensive Economic Partnership, are either ineffective or exclusive. Yet the World Economic Forum and G20 Summit can play an important role in establishing a direct line of communication by providing a venue for policymakers to meet, reduce misperceptions, and correct misinterpretations of each other’s strategic intentions and policies. For instance, Chinese Vice Premier Liu He recently delivered China’s investment pitch in Davos, making it clear that “foreign investments are welcome and the door to China will only open up further,”[xiv] which will likely boost investors’ confidence and promote bilateral economic cooperation. Likewise, when the U.S.-China relationship seemed to be in freefall on the heels of Nancy Pelosi’s visit to Taiwan, the meeting between Xi Jinping and Joe Biden during the G20 Summit in November 2022 may have helped to get it back on track. While many are concerned about great power competition and pessimistic about U.S.-China relations, the silver lining is that two-way trade and investments remain. Now it is high time for both sides to use bilateral and multilateral avenues to further such cooperation, which will benefit not only the great powers themselves but also the international community at large. This article was originally published by the Asian Peace Program of the National University of Singapore in March 2023. References: [i] Yuhan Zhang and Cheng Chang, “Modeling the US-China Trade Conflict: A Utility Theory Approach,” Journal of Applied Mathematics and Computation 5, no. 2 (2021): 84–88, https://doi.org/10.26855/jamc.2021.06.003. [ii] Bureau of Industry and Security, “U.S. Trade with China” (Washington D.C.: U.S. Department of Commerce, 2021), https://www.bis.doc.gov/index.php/country-papers/2971-2021-statistical-analysis-of-u-s-trade-with-china/file. [iii] Mary Kate Carter, “The Year in Trade: Diving Into the 2022 Numbers,” February 16, 2023, https://www.uschamber.com/international/the-year-in-trade-diving-into-the-2022-numbers. [iv] Bureau of Industry and Security, “U.S. Trade with China.” [v] Bureau of Industry and Security. [vi] Yuhan Zhang, “The Death of US–China Climate Cooperation,” Global Policy Journal, January 17, 2023, https://www.globalpolicyjournal.com/blog/17/01/2023/death-us-china-climate-cooperation. [vii] U.S. Bureau of Economic Analysis, “Foreign Direct Investment in the U.S.: Balance of Payments and Direct Investment Position Data | U.S. Bureau of Economic Analysis (BEA),” July 21, 2022, https://www.bea.gov/international/di1fdibal. [viii] Thilo Hanemann et al., “Two-Way Street – US-China Investment Trends – 2021 Update” (New York: Rhodium Group, May 19, 2021), https://rhg.com/research/twowaystreet-2021/. [ix] Office of the United States Trade Representative, “The People’s Republic of China,” accessed February 22, 2023, https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china [x] Emily Weinstein and Ngor Luong, “U.S. Outbound Investment into Chinese AI Companies” (Washington D.C.: Georgetown University, February 2023), https://cset.georgetown.edu/publication/u-s-outbound-investment-into-chinese-ai-companies/. [xi] CGTN, “US Companies Plan China Expansions, Eyeing Big Growth in China: WSJ”, February 27, 2023, https://news.cgtn.com/news/2023-02-27/U-S-companies-plan-China-expansions-eyeing-big-growth-in-China-WSJ-1hLveGpVY6k/index.html. [xii] Yuhan Zhang, “The US–China Trade War: A Political and Economic Analysis,” Indian Journal of Asian Affairs 31, no. 1/2 (2018): 53–74, https://www.jstor.org/stable/26608823. [xiii] Wanxiang America, “Wanxiang America, Inc.: Automotive Parts Manufacturer | Bearings, Drivelines | China-US Trade Facilitator | Solar Panel Manufacturer | LED Lamp Manufacturer,” accessed February 19, 2023, https://www.wanxiang.com/. [xiv] World Economic Forum, “中华人民共和国国务院副总理刘鹤在世界经济论坛2023年年会上的特别致辞 (Special Address by PRC’s Vice Premier Liu He at the World Economic Forum 2023 Annual Meeting),” 世界经济论坛, January 17, 2023, https://cn.weforum.org/agenda/2023/01/am23-special-address-china/.